By Jaimie Ratten
Founder & Managing Director
This is the first of four articles where we take look at how purpose drives company performance. It comes from research by three professors from NYU Stern School of Business, Columbia University and Harvard Business School have collaborated on the largest study of corporate purpose in relation to financial performance ever conducted1.
Over a period of six years, they analysed around 500,000 employees within 429 firms across a broad range of industries, and the results were both definitive and enlightening.
They show, categorically, that purpose is indeed a critical driver of financial performance, but that its effectiveness is predicated on four key criteria.
Let’s look at the first finding.
1. Purpose is not the pursuit of profit
Since the 1970s, thanks largely to economist Milton Friedman, corporate purpose has been largely directed towards maximising value for shareholders; the pursuit of profit.
Economic theorists argued that by owning shares in a company, shareholders are in fact owners of that company and so have ultimate authority.
There are however several flaws with this approach:
- Legally, shareholders are not “owners” of an organisation
- Shareholders do not have uniform interests
- Anonymity means lack of accountability
- Shareholders invest for short periods
- Focus on profit alone legitimises unethical behaviour2
Rather than prioritising profit for shareholders, corporations are now expected to act in the interest of all stakeholders, which includes employees, customers, and the communities in which they operate. Reflecting this shift, the study defines purpose as,
“A concrete goal that reaches beyond profit maximisation”.1
That doesn’t mean a company’s purpose has to be social or philanthropic in nature at all. It simply means that profit should be an outcome of striving for something tangible and worthwhile, not the purpose itself, a sentiment reinforced perfectly by BlackRock CEO Larry Fink, who stated that “Purpose is not the sole pursuit of profits but the animating force for achieving them.”3
A clearly defined company purpose answers the key question, ‘What is your unique reason for existing?’ as demonstrated by the following two examples:
“To save people money so they can live better.”
“To power progress with cleaner energy solutions.”
Royal Dutch Shell
Unsurprisingly, Walmart and Royal Dutch Shell were two of the top three companies in Fortune’s Global 500 for 2019.
 Gartenberg, Claudine M., Andrea Prat, & George Serafeim. (2016). Corporate Purpose and Financial Performance. Columbia Business School Research Paper No. 16-69. Retrieved from https://repository.upenn.edu/mgmt_papers/274.
 Bower, Joseph L., & Lynn S. Paine. (May-June 2017). The Error at the Heart of Corporate Leadership. Harvard Business Review. Retrieved from https://hbr.org/2017/05/managing-for-the-long-term.
 Fink, Larry. (2019). Larry Fink’s 2019 Letter to CEOs: Profit and Purpose. BlackRock. Retrieved from https://www.blackrock.com/americas-offshore/2019-larry-fink-ceo-letter.